Quantitative Easing has proved something of a mixed blessing for UK pension scheme trustees. On the one hand they have had to deal with the effects of plummeting investment yields available from both gilts, cash deposits and equities while, on the other, the robust economic recovery that has resulted from rock-bottom interest rates has enabled companies to extend greater support to their schemes.
This dichotomy was recently underlined by a survey of trustee confidence by a leading firm of pension audit & assurance accountants  who act for over 1,000 occupational schemes. This annual publication revealed that, while some 90% of schemes remain in deficit, the number of trustees expressing satisfaction with the level of employer support for their individual schemes has risen a further 12% to 88 % for the combined “Good” and “Very Good” categories compared with the previous year.
By the same token, there was a very noticeable drop (from 71% to 54%) in the number of trustees who felt that their respective employers were contributing as much as they could do, an opinion which clearly reflects the recovery in company fortunes since the previous year.
Despite the fact that 9 out of every 10 Defined Benefit schemes continue to be in deficit, it is encouraging to note that three quarters of respondents had between 70% and 90% of liabilities covered on a technical provisions basis. Against this background it is interesting to see trustees adopting a firmer line with employers when it comes to recovery plans. They clearly take the view that companies can now afford to contribute more to recovery plans with employers now that their fortunes are clearly improving. Only 10% of employers have asked for such plans to be rescheduled over a longer period now that the Pensions Regulator has signalled a more flexible approach to the length of recovery plans.
Another interesting finding by the survey is a noticeable fall in the number of trustees asking for quarterly and annual financial reviews when monitoring their employers’ covenants. Instead, there has been an increase from 14% to 27% in the number of respondents using half-yearly reviews. This probably reflects the desire of trustees to strike a reasonable balance between shorter term data and a longer term strategic view. However, given how volatile economic and business conditions remain, one wonders whether half yearly snapshots are frequent enough for cautious monitoring.
Considering the emphasis that the Pensions Regulator places on the ability of trustees to form their own objective view of the employer’s financial position and future prospects, it is not surprising that many of them use outside accountants who have specialist covenant assessment teams who can assist in conducting stress tests on the employer’s finances and, where necessary, help to negotiate a suitable recovery plan. These specialists can also help with ongoing monitoring of the employer’s financial situation, especially during periods of adverse trading conditions. All this can, of course, reduce the risk that trustees face in terms of personal liability for a fund’s shortfall in the event that the sponsoring employer fails.